4 Factors That Affected the 2018 COLA (Cost of Living Adjustment)

October 25, 2017

The government annually reviews the cost of living for retired federal employees and Social Security recipients to determine whether it needs to increase payment amounts. This cost of living adjustment (COLA) takes into consideration the costs associated with basic amenities like food, housing payments, gas, communication, and medical care. If one of these aspects has increased significantly, then the 2018 COLA will increase.

This year, there is good news for recipients of Social Security: the 2018 COLA is the largest increase in the past six years, with an increase of 2% for participants (roughly $25 per month).

More than 60% of Social Security recipients rely on their payments for more than half of their income. Here are four factors that affected this year’s 2018 COLA and why the government believes American citizens are paying more for their cost of living.

Factor #1) 2017 Hurricanes Increased Gas Prices

Hurricanes Harvey and Irma made landfall in mainland America while Hurricane Maria devastated Puerto Rico. Many of these regions are still picking up the pieces and trying to regain some semblance of normalcy. However, these storms also had rippling effects across the rest of the country.

Demand for gas skyrocketed in the Southeast as residents scrambled to fill their tanks and evacuate. Many ports and channels for gas — including the port of Tampa and petroleum pipes in Texas — had to shut down while operators waited several days until the hurricane passed to open them again. This situation increased gas prices and the overall cost of living in the country.

Initially, experts had predicted a 1.5% cost of living increase, but due to the storms, employees will receive a 2% increase instead.

Factor #2) Housing Costs Increased for Renters and Owners

Along with gas prices, housing also affected the 2018 COLA. The overall American housing index continued to grow in 2017, with the average costs for renters increasing by 3.8% and home ownership increasing by 3.2%. This increase is on par with multiple expert predictions from the start of the year. Housing costs are expected to increase slowly while affordability is expected to worsen.

Depending on their mortgages, some Social Security recipients are considering downsizing to smaller homes or selling their houses to have a smaller financial burden by renting. Considering both rent and ownership prices increased, it’s not surprising that the 2018 COLA was increased as much as it was.

Factor #3) Fruit and Vegetables Provided the Largest Food Increases

According to the Bureau of Labor Statistics, prices for food and beverages remained flat through 2017 compared to previous years. However, by diving into various food groups, it’s possible to see exactly what consumers are struggling to pay for.

The cost of fruit and vegetables increased 1.2% in the past year, one of the largest jumps in expense across all grocery chains. Conversely, the overall price for eating at home only increased 0.4%. Experts attribute the stagnant growth to the price of bread and dairy products — all of which experienced slight declines over the past year.

Like the housing index, this information shows where federal retirees and social security beneficiaries will feel the most pain in their pockets. More Americans are likely to turn to more affordable bread products if they feel like fruit and vegetables are out of their reach.

Factor #4) The Medical Care Index Fell Slightly in 2017

While the rise of gas, housing, and food costs aren’t ideal for many Social Security beneficiaries, there is some good news: the overall medical care index fell, meaning prices for prescription and nonprescription medication declined.

Many retired Americans keep a close eye on their medical costs and health insurance, especially as Congress works to adjust Medicare and Medicaid coverage. By saving a little on medications and health services, older Americans might be better prepared to weather changes to their Medicare coverage.

It’s important to note that the 2018 COLA and the Congressional changes to Medicare are two different topics. The COLA factors in medical costs like the price of medication and services as part of the overall social security budget. Meanwhile, Medicare costs and prices focus on coverage for customers. Just because the consumer medical costs index decreased doesn’t mean this will affect Medicare plans in any way.

How Will The 2018 COLA Impact You?

The updated 2018 COLA is good news for recipients of Social Security and retirement benefits, and by understanding the causes behind the increase, Americans can better decide how to spend their money. Considering the largest increase this year was gas prices, retirees looking to save might search for opportunities to carpool or use public transportation. This way they can use the expected increase to cover rent increases or additional food costs.

To discuss what the 2018 COLA means for your benefits, contact a MyFedBenefits specialist near you. We can review your options and discuss how these changes can impact your lifestyle.

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